October 28, 2005

November 25, 2005

On Nov. 7th, U.S. regulatory filings revealed that billionaire investor Carl Icahn had accumulated a 9.3% stake in Fairmont Hotels & Resorts Inc. In the documents filed with regulators, Mr. Icahn cited Fairmont’s undervalued share price for the reason behind his investment. Elaborating further, Mr. Icahn suggested that Fairmont executives pursue strategic alternatives such as asset sales and share buybacks to unlock shareholder value. Given the demand for hotel assets from private equity groups, supply constraints, prohibitive construction costs, and historically low financing costs, we agree that many hotel assets are not properly priced in the public markets. As evidence, another ABC Funds holding, La Quinta Properties, agreed to be purchased by The Blackstone Group two days after Mr. Icahn’s Fairmont stake was made public.

We believe that, on balance, this news is positive for unit holders of Legacy Hotels REIT. While it is too early to speculate on Mr. Icahn’s endgame, one possible option may be to put Fairmont “in play”. Any purchaser of Fairmont would have to decide what to do with the Company’s 24% interest in Legacy. Considering that Legacy is immaterial in every respect to Fairmont’s bottom line, the most obvious course of action would be to carve out Legacy and deliver it to a real estate player who could unlock its underlying value. Fairmont, remaining Legacy’s property manager, could use the sale proceeds (which could be around $220 million) to reinvigorate its focus on its core business of hotel and resort management.

Interestingly, Legacy would command a higher valuation outside of a REIT structure. A private entity or corporation could unlock Legacy’s hidden assets to the fullest. Legacy has identified numerous value creating opportunities such as condo conversions, joint venture construction projects, and land sales. However, Legacy’s Declaration of Trust, which explicitly states that its reason for being is to pay out a stream of income to unit holders, restricts its ability to employ risk capital. Under a corporate structure, significant risk capital could be deployed while simultaneously reinvesting the $33,000,000 that is paid out to unit holders every year. Given that Legacy has nearly $2.00 per unit in land (adjusted to market value), and an estimated $0.50 - $1.50 in incremental development opportunities, Legacy’s net asset value (NAV) could be more than $10.00 per unit if its assets were placed under a different corporate structure.

Of course, Fairmont may ultimately decide to maintain the status quo. Fairmont and Legacy have stressed that their relationship is strategically important. Whether or not any immediate action results from Mr. Icahn’s interest in Fairmont, Legacy’s compelling under-valuation does not change.

February 3, 2006

With Kingdom Hotels rescuing Fairmont from the clutches of Carl Icahn, the fate of Legacy Hotels is now open to speculation. While Legacy was not mentioned in Fairmont’s initial press release, we believe that Legacy will be the focus of Raffles/Fairmont executives as the deal comes to a close in the second quarter of 2006. The absence of Legacy from the deal has led some to believe that the Trust’s fate is on the backburner. However, we point to the fact that Legacy owns 40% of Fairmont branded hotels in Canada and 24% of Fairmont branded hotels around the world. Clearly, Legacy plays an important role in the future of the Fairmont brand.

We see three clear alternatives in front of the Fairmont/Raffles organization: purchase Legacy outright and fold it into Fairmont/Raffles, facilitate the sale of the Trust to a third party, or sell its 24% interest to the public market. While status quo was once a viable alternative, Fairmont’s current relationship with Legacy does not make sense within the context of an organization with over 120 hotels in 24 countries. From a financial perspective, Legacy was already non-essential to Fairmont; now, as part of a much larger entity, its contribution to the bottom line is even less significant. The old Fairmont management was content to let its real estate portfolio, which included Legacy, languish despite record real estate values (which opened up the door to Carl Icahn). We suspect that the new Fairmont/Raffles team will critically analyze the $180,000,000 that is tied up in this underperforming investment and eventually realize the true value of Legacy’s portfolio for the benefit of all investors.

February 9, 2007

When we purchased Legacy Hotels late in 2005 we envisioned holding the security for many years as the REIT undertook initiatives to bridge the gap between its market price and the fair value of its hotel properties. With Legacy units up approximately 50% since our purchase, we felt it important to re-examine our position in light of the current environment.

The real estate landscape has changed dramatically over the last year. Record investment activity in the hotel industry ($2.6 billion last year in Canada alone) has pushed capitalization rates to increasingly low levels. For example, the cap rate on the recent sale of seven Fairmont hotels to Oxford was below 5.00%. Many hotel transactions south of the border have been consummated with rates between 5.50% and 6.50%. Legacy’s unit price has continued to rise as lower and lower transaction multiples are reported.

Now trading close to $11.00 and with an implied cap rate between 6% - 6.5%, we believe that Legacy’s units appropriately reflect the fundamental value of the REIT’s properties. As outlined in our previous updates, we have always felt that Legacy would be an attractive takeover target, and we recognize that in light of the recent frenzied demand for hotel properties the REIT could be taken out at a higher level. Amidst such euphoria, we see signs on the horizon that lead us to take a more cautious stance. Rock bottom cap rates make it virtually impossible for publicly traded REITs such as Legacy to execute accretive deals. With the cost of capital above cap rates, higher debt levels and aggressive assumptions about future performance are required to justify deals. More broadly, we question if such low cap rates (in some cases below T-bills) are appropriate for such a notoriously cyclical industry that demands large capital expenditure to grow at a rate higher than inflation.

With so many parties armed with cheap money, investor speculation could push Legacy’s units higher. However, we are currently finding more compelling opportunities on a risk/reward basis. Accordingly, we have liquidated our entire position in Legacy. We take comfort from the fact that many long-standing industry participants such as Sam Zell and Lou Maroun have decided to take advantage of the frenzied activity to take their chips off the table as well.